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I would like to thank my project guide Prof. Rakhi Sharma for her

support & guidance at every stage of my project.

Finally my deepest regards for the Finance faculty at IMCOST for

strengthening my fundamental concepts in financial management,

which helped me successfully, complete this project.

I also take this opportunity to thank all my faculty members and library

staff without whose support this work would not have been possible.

I am grateful to my parents and my friends for always supporting me in

all my endeavors.

Dhananjay Shirke


MET Institute.


Yamaha corporate identity

Yamaha motors corporate mission is “We Create Kando: Touching your heart”
Kando is the Japanese word to express feelings of excitement and deep
For them the forms that these feelings can take are as varied as the peoples all
around the world for experience then with Yamaha products in their lives and work on
land, on sea and in air.
And as their progress and the concerns of the environment change, the standard
by which they measures true satisfaction in their lives has also changed. That is why at
Yamaha motors they know that they must constantly evolving as a company. And
therefore they are passionately dedicated to the challenge of being a company that creates
At Yamaha Motor, are committed to creating a higher level of customer
satisfaction using their ingenuity and enthusiasm to enrich people’s lives.


Surpassing customer expectations

They remain keenly aware of their customers’ evolving needs and provide them
with quality products and services of exceptional value that surpass their expectations.

Establishing a corporate environment that fosters self esteem

They believe in nurturing and empowering their employees to the fullest. Whilst
cultivating their employees’ creativity and all-round abilities, they have also established

an equitable system of evaluation and rewards to encourage their people to strive towards
newer benchmarks.

Fulfilling social responsibilities

As a good corporate citizen, they continually strive towards creating a better
social as well as natural environment.



Their goal is to enhance the enjoyment that people find in mobility.
At Yamaha, they constantly attempt to innovate to make this possible and continue their
pursuit to seek an ideal harmony, between people and machines and create new thrills.

Fresh challenges have always helped them open up new world of excitement for
them, as well as, for their customers. This is readily evident from Yamaha’s history and
the many ‘Firsts’ that go along with Yamaha name. It is the ame spirit of challenge that
fuses the Yamaha world, year after year, even today.

The products they provide- motorcycles, water and recreational vehicles- add to
life’s fun and excitement. At Yamaha they are committed to ignite the sense of adventure
in their customers, and support people who take the challenge for seeking new heights.

Yamaha motor India

Yamaha Motor India Private Limited (YMI) is 100% subsidiary of Yamaha Motor
Corporation limited (YMC), Japan.

Incorporated in August 2001, YMI manufactures and markets a wide range of
motorcycles that meet international Yamaha technology standards. Aimed, at both the
domestic and international markets, each Yamaha motorcycle that rolls out of YMI plants
is suitably designed to perform under demanding Indian and global conditions.
Eighteen motorcycle models currently roll out of YMI’s state –of –the-art manufacturing
facilities at Faridabad and Surajpur. Of these, eleven models are sold in the country,
while the rest feed Yamaha’s global markets.
Having operated in India through various joint ventures for nearly two decades, Yamaha
Is today in the process of reorienting all its business process to cater to the evolving needs
of the discerning global motorcycle buyer.

1960: Indian partners, escorts group secured license under technical

Collaborations with CEKOP Poland.

1979: entered into technical collaborations with YMC of Japan for

manufacturing 350 cc motorcycles.

1983: obtained letter of intent for 100 cc motorcycles. launched 350cc

motorcycles in market all over India. Setup CNC cell in the

1985: started manufacturing of RX-100 motorcycle in technical

Collaborations with YMC, Japan at Surajpur plant.

1995:50 joint venture Company formed an escorts group.

1996: Added Faridabad plant under joint venture.

2000 : Share holding of YMC increased from 50% to 74%.

2001 : 100% of YMC, Japan

Research & development:

R&D efforts are targeted at building vehicles that have the least possible impact
on the physical environment, both in emission and conservation-fuel economy being a
major thrust. Our aim is to continue to see ever higher levels of environment friendliness
in our products, our manufacturing facilities and distribution processes.

The R&D center is continually engaged in attempting the latest cutting-edge
technologies to suit Indian conditions. This stems from YMI’s desire to continually bring
better products to the customers.
The ongoing research programme also provides the starting point to YMI’s
diversification strategy. At YMI, they believe technology is a means to provide joy to the
customer, and our products are the torchbearers of this philosophy.

Challenge of competition
Constantly upgrading the 4ms- man. Machine, material &method, is a challenge
to our R&D team. Even as they help develop better products to our consumers, the team
strives to ensure that the Yamaha offering meets every challenge in the market place. It is
only natural, therefore, that Yamaha bikes are the hot favorites in the global motorcycle
racing circuit.

YMI currently boasts of a strong dealer network of 406 dedicated dealers across
the country.
YMI points go far beyond showcasing the latest range of Yamaha products and
providing easy finance options. YMI dealers are taken through series of programmes to
upgrade knowledge and technical skills on all the aspects of the product line. Training

support from the company is extended to technician and customer support staff so as to
ensure a completely satisfying experience for the customer. YMI is in a process of
establishing a strong authorized service centers and sales management system across the
length and breath of the country.

YMI is on the fast track to making its presence felt in all segments of the two
wheeler industry, offering exiting machines not only to Indian customers but also to also
to export markets around the world.
Motorcycles manufactured at the YMI facilities are exported to over 50 countries
including Argentina, Mexico, Bangladesh, Sri Lanka, Colombia, Dominican Republic,
Nigeria, and the Ivory Coast.
To reinforce its foray into global markets, YMI is rapidly expanding its manufacturing
presence in Asia, Africa and central and South America. In the process YMI is
strengthening its reputation in high quality products and services, while catering market
needs around the world.


1. Objective of the study 01

2. Methodology 02
3. Working Capital Management 03
4. Cash Management 11
5. Inventory Management 21
6. Receivables Management 36
7. Payables Management 49
8. Working Capital Finance 55
9. Role of Banks 60
10. Citibank 61
11. Recommendations 69
12. Limitations 70
13. Bibliography 71
14. Annexure 72


Title Of The Project

Working Capital Management in Yamaha

The objective of this project is to find out the short-term liquidity of the firm by
analyzing the various aspects of the operating cycle i.e. the cash operations, inventory,
reivables and payables. Also what role can the bank play in helping the firm in managing
the working capital efficiently.
The various aspects of the operating cycle have been analyzed through the data given in
the balance sheet of the company.
As far as the company’s cash position is considered, the firm maintains a low level of idle
cash balance since sufficient working capital limit is available to it and as a result of
which it can borrow from the bank as in when the need arises.
The firms inventory turnover ratio has improved over the years but still more attention
needs to be paid on finished goods inventory turnover. The firm’s average collection
period has gone up and the firm is trying to reduce its cost of debtors further through
outsourcing receivables to banks.
There has been an increase in the creditors turnover ratio and it has been suggested that
the firm should go in for the certain services offered by Citibank to reduce it’s cost of
Also there is a close relationship among the various aspects of the operating cycle. As
sales of the company goes up the debtors or receivables also go up, whereas the inventory
of finished goods go down.
Further since the sales are going up purchases of raw materials is going up and as a result
the creditors for purchase of raw materials also go up. Thus sales, debtors and creditors
move in the same direction, where is the inventory move in the different direction.

Thus it can be concluded that the overall position of the firm in terms of working capital
requirements is quite satisfactory and it can be made more efficient by utilizing offered


The main objective of this study is to have an insight into the

practices of the company with regards to management of various
elements of working capital.
An attempt will also be made to find out whether or not, to what
extent, the working capital management is efficient and effective in
Automobile industry, more specifically in Yamaha motors and in Bajaj
Motors. Ways and means to improve working capital management
would also be suggested which lead to better productivity.
Apart from the above, more specifically the present study is
conducted to find out as follows:
• Whether the firm has adequate liquidity throughout the
period which leads to risk return trade off.
• To study management’s policies regarding inventory
• How far has the firm has being successful in managing and
collection of receivables in time?
• How far the firm has been successful in managing accounts


Both primary and secondary sources of information have been used. Primary data
has been collected regarding the role of Citibank in working capital management by
visiting their office. For all other data, secondary sources of information such as
company’s annual reports and other journals have been referred to.
Various techniques such as ratio analysis, comparative statements, graphs etc
have been used.


Working capital management is concerned with the problems that arise in attempting to
manage the current assets, the current liabilities and the interrelationship that exist
between them. The term current assets refer to those assets, which in ordinary course of
business can be, or will be, converted into cash within one year without undergoing
diminution in value and without disrupting the operations of the firm. The major current
assets are cash, marketable securities, accounts receivable and inventory. Current
liabilities are those liabilities, which are intended, at their inception, to be paid in the
ordinary course of business, within a year, out of current assets or earnings of the
concern. The basic current liabilities are accounts payable, bills payable, bank overdraft,
and outstanding expenses. The goal of working capital management is to manage the
firm’s current assets and liabilities in such a way that a satisfactory level of working
capital is maintained. This is so because if the firm cannot maintain a satisfactory level of
working capital, it is likely to become insolvent and may even be forced into bankruptcy.

There are two concepts of working capital: gross and net. The term gross working capital,
also referred to as working capital, means the total current assets. Net working capital is
commonly defined as the difference between current assets and current liabilities.
Efficient working capital management requires that firms should operate with some
amount of NWC, the exact amount varying from firm to firm and depending, among
other things, on the nature of the industry. The theoretical justification for the use of
NWC to measure liquidity is based on the premise that the greater the margin by which
the current assets cover the short term obligations, the more is the ability to pay
obligations when they become due for payment. The NWC is necessary because the cash
outflows and inflows do not coincide. NWC can alternatively define as that part of the
current assets which are financed with long term funds. Since current liabilities represent
sources of short term funds, as long as current assets exceed the current liabilities, the
excess must be financed with long term funds.

In evaluating a firm’s NWC position, an important consideration is the trade off between
profitability and risk. The term profitability used in this context is measured by profits
after expenses. The term risk is defined as the probability that a firm will become
technically insolvent so that it will not be able to meet its obligations when they become
due for payment. The relationship between liquidity, NWC and risk is such that if either
NWC or liquidity increases, the firm’s risk decreases.

Need for working capital

Given the objective of financial decision making, it is necessary to generate sufficient
profits. The extent to which profits can be earned will naturally depend, among other
things, upon the magnitude of the sales. A successful sales programme is, in other words,
necessary for earning profits by any business enterprise. However, sales do not convert
into cash instantly; there is invariably a time lag between the sale of goods and the receipt
of cash. There is, therefore, a need for working capital in the form of current assets to
deal with the problem arising out of the lack of immediate realization of cash against
goods sold. Therefore, sufficient working capital is necessary to sustain sales activity.
Technically, this is referred to as the operating or cash cycle. ‘the continuing flow from
cash to suppliers, to inventory, to accounts receivable and back into cash is what is called
the operating cycle’. The term cash cycle refers to the length of time necessary to
complete the following cycle of events:
1. Conversion of cash into inventory;
2. Conversion of inventory into receivables;
3. Conversion of receivables into cash.
Therefore the three important components of working capital management are cash
management, inventory management and receivables management.

To carry on business, a certain minimum level of working capital is necessary on a

continuous and uninterrupted basis. This requirement has to be met permanently as with
other fixed assets and is referred to as permanent or fixed working capital. Any amount
over and above the permanent level of working capital is temporary, fluctuating or
variable working capital.

Determinants of working capital
A firm should plan its operations in such a way that it should have neither too much nor
too little working capital. The total working capital requirement is determined by a wide
variety of factors. These factors, however, affect different enterprises differently. They
also vary from time to time. Some of these factors are:
1. General nature of business: the working capital requirements are basically related
to the conduct of business. For instance, public utilities have certain features which
have a bearing on their working capital needs. The two relevant features are: the cash
nature of business, that is, cash sale, and sale of services rather than commodities. In
view of these features, they do not maintain big inventories and have, therefore,
probably the least requirement of working capital. At the other extreme are trading
and financial enterprises. The nature of their business is such that they have to
maintain a sufficient amount of cash, inventories and book debts. They have to
necessarily to invest proportionately large amounts in working capital.
2. Production cycle: the term ‘production or manufacturing cycle’ refers to the time
involved in the manufacture of goods. It covers the time span between the
procurement of raw materials and the completion of the manufacturing process
leading to the production of finished goods. The longer the time spans (i.e. the
production cycle), the larger will be the tied up funds and, therefore, the larger is the
working capital needed and vice versa.
3. Business cycle: business fluctuations lead to cyclical and seasonal changes which,
in turn, cause a shift in the working capital position, particularly for temporary
working capital requirements. The variations in business conditions may be in two
directions: (1) upward phase when boom conditions prevail, and (2) downsizing
phase. During the upswing of business activity, the need for working capital is likely
to grow to cover the lag between increased sales and receipt of cash as well as to
finance purchases of additional material to cater to the expansion of the level of
activity. Additional funds may also be required to invest in plant and machinery to
meet the increased demand. The need for working capital is likely to decline in
recessionary conditions.

4. Credit policy: credit policy relating to purchases and sales also affects the
working capital. The credit terms granted to customers have a bearing on the
magnitude of working capital by determining the level of book debts. The credit sales
result in higher book debts (receivables). Higher book debts mean more working
capital. On the other hand, if liberal credit terms are available from the suppliers of
goods (trade creditors); the need for working capital is less. Thus, adoption of
rationalized credit policies will be a significant factor in determining the working
capital needs of an enterprise.
5. Growth and expansion: as a company grows a larger amount of working capital is
6. Vagaries in the availability of raw material: the availability or otherwise of certain
raw materials on a continuous basis without interruption would sometimes affect the
requirement of working capital. To sustain smooth production, therefore, the firm
might be compelled to purchase and stock them far in excess of genuine production
needs. This will result in an excessive inventory of such materials and also working
capital requirements will be more.
7. Profit level: higher profit margin would improve the prospects of generating more
internal funds thereby contributing to the working capital pool. The net profits are a
source of working capital to the extent that it has been earned in cash.
8. Price level changes: rising prices necessitate the use of more funds for
maintaining an existing level of activity. For the same level of current assets, higher
cash outlays are required.

The liquidity of working capital is an important aspect to be analyzed by the management

for maintaining proper liquid resources to meet both operational requirements as well as
financing commitment of repayment of borrowed funds.

In order to understand the net working capital requirements of Yamaha and its liquidity
position ratios such as current ratio, quick ratio, what percentage of the total assets do the
current assets form, etc have been calculated and the conclusion regarding its liquidity
position has been made.

Current Ratio
This ratio gives the relationship between current assets and current liabilities.

Current Ratio = Current assets

Current liabilities

The current ratio of a firm measures its short-term solvency, that is, its ability to meet
short term obligations. As a measure of short-term/current financial liquidity, it indicates
the rupees of current assets available for each rupee of current liability/obligation. The
higher the current ratio, the larger is the amount of rupees available per rupee of current
liability, the more is the firm’s ability to meet current obligations and greater is the safety
of funds of short-term creditors. In simple words, higher the value of the current ratio,
more liquid the firm is and more ability it has to pay its bills and vice-versa. Thus, in a
way it is a measure of margin of safety to the creditors. A current ratio of 2:1 is
considered satisfactory. It indicates that in the worst situation even if the value of current
assets goes down by half, management would still be able to repay the debts and meet its
obligations. However a relatively very high ratio indicates slackness of management
practices as reflected in excessive holding of current assets.
Yamaha’s current ratio for the past three years has been as follows:

Years Yamaha Bajaj

2008 2.1290 0.8818
2009 2.2442 0.9228
2010 2.5705 0.6966

Its current ratio has been more than 2:1 for 2003 and 2005 which indicates that it had no
problems in discharging its short-term obligations in the past. However it also indicates
that the firm has not been able to manage its current assets most effectively. It seems that
more amounts are invested in current assets than is desirable. The reason for high current
ratio is storing of excessive inventory for the current requirements and/or poor credit
management in terms of overextended accounts receivables. Also it’s quite possible that

it has not made full utilization of its current borrowing capacity. But in the year 2004,
Yamaha’s current ratio went slightly below 2:1 (1.81:1), the reason being a fall in current
assets because of a fall in inventory of finished goods and also an increase in current
liabilities, which was because of an increase in sundry creditors.

Acid Test Ratio

One defect of current ratio is that it fails to convey any information on the composition of
the current assets of the firm. A rupee of cash is considered equivalent to a rupee of
inventory or receivables. But it is not so. A rupee of cash is more readily available to
meet current obligations than a rupee of, say, inventory. This impairs the usefulness of
the current assets. The acid test ratio is a measure of liquidity designed to overcome this
defect of the current ratio. It is often referred to as quick ratio because it is a measurement
of a firm’s ability to convert its current assets quickly into cash in order to meet its
current liabilities.
The acid test ratio is calculated by dividing the quick assets by the current liabilities.

Acid Test Ratio = Quick Assets

Current Liabilities

The term quick assets include cash and bank balances, short-term marketable securities
and debtors/receivables. The usefulness of the ratio lies in the fact that it is widely
accepted as the best available test of liquidity position of a firm. An acid test ratio of 1:1
is considered satisfactory.

Years Yamaha Bajaj

2008 1.148 0.65
2009 0.977 0.73
2010 1.037 0.55

Yamaha’s acid test ratio shows a fluctuating trend over the past three years though it is
more than 1:1. Thus we can say that Yamaha does not face any problems on liquidity

front. It has sufficient assets to discharge its short-term obligations as an when they
become due.

Thus, it can be concluded that Yamaha’s liquidity ratios like current ratio, liquid ratio are
satisfactory and it can be inferred from them that the firm will be able to meet its short-
term obligations as an when they become due.

Another ratio which is important is current assets as a proportion of total assets. This ratio
tells us how much funds of the company are employed in current assets as compared to
the total amount of funds invested in total assets.

Years CA To TA Change
2003 0.313 100
2004 0.26 -0.053
2005 0.354 0.094

It is very clear from the above figures that the proportion of current assets in the asset
portfolio of the company is not high. Infact, it is not even fifty percent of the total assets.
There has been a fall in the proportion of current assets by almost five percent in 2004.
However, in 2005 the proportion of current assets again went up and increase has been
around nine percent.

The efficiency with which working capital is being used by the management can also be
analyzed in terms of the overall working capital ratio.

It is calculated by dividing the amount of net sales by average amount of net working
capital during the year.

Working Capital Turnover Ratio = Net Sales

Average net working capital

This ratio indicates the rate of working capital utilization in the firm.

Working capital %
Years turnover ratio Change
2003 4.842 100
2004 10.232 5.39
2005 5.247 -4.985

The firm’s working capital turnover ratio has declined as compared to 2004. This implies
that in 2005 more amount of working capital has been required or the investment in
working capital has been more than what is required. A decreasing net working capital
turnover ratio is indicative of relative inefficiency in the use of working capital.

A variant of this ratio is current asset turnover ratio.

Current asset turnover = cost of goods sold

Average current asset

It again indicates the rate at which working capital has been used. A higher ratio is
considered an indicator of better efficiency and a lower one the opposite.

current asset turnover %

Years ratio Change
2003 2.379 100
2004 3.916 1.54
2005 2.989 -0.93

Yamaha’s current asset turnover ratio has been around three to four percent for the past
few years.


Cash management is one of the key areas of working capital management. Apart from the
fact that cash is the most liquid current asset, cash is the common denominator to which
all current assets can be reduced because the other major liquid assets, that is, receivables
and inventory get eventually converted into cash. There are four primary motives for
maintaining cash balance: (1) Transaction motive, (2) Precautionary motive, (3)
speculative motive (4) Compensating motive.

The basic objectives of cash management are two fold: (a) to meet the cash disbursement
needs (payment schedule); (b) to minimize funds committed to cash balances.

Meeting payments schedule

Firms have to make payments of cash on a continuous and regular basis to supplier of
goods, employees and so on. Also there is a constant inflow of cash through collection
from debtors. A basic objective of cash management is to meet the payment schedule,
that is, to have sufficient cash to meet the cash disbursement needs of a firm.

The advantages of adequate cash are: (1) it prevents insolvency or bankruptcy arising out
of the inability of a firm to meet its obligations; (2) the relationship with the bank is not
strained; (3) it helps in fostering good relations with trade creditors and suppliers of raw
materials, as prompt payment may help their own cash management; (4) a cash discount
can be availed of if payment is made within the due date; (5) it leads to strong credit
rating; (6) the advantage of favorable business opportunities; (7) the firm can meet
unanticipated cash expenditure with a minimum of strain during emergencies. Keeping
large cash balances, however, implies a high cost.

Minimizing funds committed to cash balances

A high level of cash balances will, ensure prompt payment together with all the
advantages. But it also implies that large funds will remain idle, as cash is non earning
asset and the firm will have to forego profits. A low level of cash balances, on the other
hand, may mean failure to meet the payment schedule. The aim of cash management,
therefore, should be to have an optimal amount of cash balances.

Factors determining cash needs:
1. Synchronization of cash flows: the need for maintaining cash balances arises from
the non-synchronization of the inflow and outflows of cash: if the receipts and
payments of cash perfectly coincide or balance each other, there would be no need
for cash balances. The first consideration in determining the cash need is,
therefore, the extent of non synchronization of cash receipts and disbursements.
2. Short costs: another factor is the cost associated with a shortfall in the cash needs.
Every shortage of cash-whether expected or unexpected – involves a cost
‘depending upon the severity, duration and frequency of the shortfall and how the
shortage is covered. Expenses incurred as a result of shortfall are called short
costs. Transaction costs, borrowing costs, loss of cash discount, cost associated
with deterioration of the credit rating, penalty rates are included in short costs.
3. Excess cash balance costs: the cost of having excessively large cash balances is
known as the excess cash balance cost. If large funds are idle, the implication is
that the firm has missed opportunities to invest those funds and has thereby lost
interest which it would otherwise have earned. This loss of interest is primarily
the excess cost.
4. Procurement and management: these are the costs associated with establishing
and operating cash management staff and activities. They are generally fixed and
mainly accounted for by salary, storage, handling of securities and so on.
5. Uncertainty and cash management: the impact of uncertainty on cash
management strategy is also relevant as cash flows cannot predict with complete
accuracy. The first requirement is precautionary cushion to cope with
irregularities in cash flows, unexpected delays in collection and disbursements,
defaults and unexpected cash needs. The impact of uncertainty on cash
management can, however, be mitigated through improved forecasting of tax
payments, capital expenditure, dividends, increased ability to borrow through
overdraft facility and so on.

Cash Management: Basic Strategies
The broad cash management strategies are essentially related to the cash turnover
process, that is, the cash cycle together with the cash turnover. The cash cycle refers
to the process by which cash is used to purchase materials from which are produced
goods, which are then sold to the customers, who later pay the bills. The firm receives
cash from customers and the cycle repeats itself. The cash turnover means the number
of times cash is used during each year. The steps involved in cash cycle starts with
materials ordered, materials received, payments, cheque clearance, goods sold,
customer mails payment, payment received, cheques deposited and finally funds

The cash cycle of the firm can be calculated by finding the average number of days
that elapse between the cash outflows associated with paying accounts payable and
the cash inflows associated with collecting accounts receivable. The cash turnover is
found by dividing the number of days in a year by the cash cycle.

The higher the cash turnover, the less is the cash the firm requires. However a
minimum amount of operating cash balance should be maintained.

Cash management strategies are intended to minimize the operating cash balance
requirement. The basic strategies are as follows:

1. Stretching accounts payable: a firm should pay its accounts payable as late as
possible without damaging its credit standing. It should, however, take advantage
of the cash discount available on prompt payment.
2. Efficient inventory-production management: another strategy is to increase the
inventory turnover, avoiding stock outs. This can be done by increasing the raw
materials turnover or decreasing the production cycle or increasing the finished
goods turnover.

3. Speeding collection of accounts receivable: another strategy is to collect accounts
receivable as quickly as possible without losing future sales because of high
pressure collection techniques.
4. Combined cash management strategies: all the above three strategies can be used

There are some specific techniques and processes for speedy collection of receivables
from customers and slowing disbursements.

For speedy cash collections the customers should be encouraged to pay as quickly as
possible. One way of this is to ensure prompt billing. What the customer has to pay
and the period of payment should be notified accurately and in advance. Another
technique is to offer cash discounts. Also the payment from customers should be
converted into cash without any delay. Once the customer makes the payment by
writing a cheque in favour of the firm, the collection can be expedited by prompt
encashment of the cheque. Usually there is a lag between the time a cheque is
prepared and mailed by the customer and the time the funds are included in the cash
reservoir of the firm.

For slowing disbursements also there are various techniques such as avoidance of
early payments, centralized disbursements, floats and accruals. The term float refers
to the amount of money tied up in cheques that have been written, but have yet to be
collected and encashed. There are two ways of doing it: paying from a distant bank
and scientific cheque-cashing analysis. Accruals are defined as current liabilities that
represent a service or goods received by a firm but not yet paid.

As far as Yamaha’s cash position is considered and how strong it is, it can be determined
by analyzing the size of cash that the company has, the ratio of cash to current assets,
cash turnover ratio and cash flow statement.

Cash is considered an idle asset as it does not earn any return. Therefore, a balance has to
be struck between too much and too less an amount of cash that a firm should have.
Efficient management of cash requires that there should be a proper balance between
cash needs of the concern to the average balance of cash held by it during the year.

Cash turnover ratio = cash operating expenses during the year

Average cash balance during the year

Cash turnover Bajaj

Years ratio
2008 18.67
2009 24.77
2010 128.98

Yamaha’s cash ratio shows an increasing trend over the years. Normally, an increase in
this ratio reflects intensive utilization of cash. However, in this case the reason for the
increase is a decrease in the denominator of this ratio i.e... the average balance of cash
held during the year. The reason for a five times increase in the ratio in 2005 is a
tremendous decrease in the average balance of cash held during that year.

Another tool used for this purpose is cash ratio. It is an absolute liquidity ratio. It is the
most rigorous test of the liquidity position of business unit. It determines how many times
cash and other marketable securities cover current liabilities. It is calculated as

Cash Ratio = Cash and marketable securities

Current liabilities

Years Cash ratio % Change Bajaj

2008 0.572 100
2009 0.078 -0.494

2010 0.049 -0.029

Cash ratio for Yamaha over the past few years shows a declining trend indicating that
over the years less amount is being held in form of cash and bank balance and marketable
securities and more is being invested in other current assets such as debtors or
inventories. Ideally cash ratio should be fifty percent of current assets or 1:2. But for
Yamaha it is less than even 1:1 for all the years.

Another ratio that indicates the cash position of the firm is cash to current asset ratio.
This ratio indicates the amount of money that has been held in the form of cash and bank
balance as compared to total amount invested in current assets.

Cash to
Years CA ratio % Change
2008 0.269 100
2009 0.043 -0.226
2010 0.02 -0.023

As clear from the above table, the proportion of cash to current assets has been declining
over the years. Less and less amount is being invested in cash over the years.

Whether low cash balance is a problem for the company or not depends upon the
company’s working capital limits. Since Yamaha has sufficient working capital limit
available, it can borrow from the bank and pay off its current liabilities as and when the
need arises. There is no need for the company to keep its cash idle for this purpose. It can
invest it somewhere else and earn a return on it. When the rate of borrowing from the
bank is lower than rate of earning from the investment, it is always advantageous to
borrow from the bank and pay rather than keeping your cash idle for the same.

Another important tool is cash flow statement analysis. An increase or decrease in the
individual elements of current assets (other than cash) and liabilities affect cash in

different ways. For example an increase in sundry creditors and bank overdraft has
different implications in terms of repayment of cash. Sundry creditors’ bill may fall due
after one month or two months. But bank overdraft facility may be for a longer duration.
Thus, it is possible that the firm is in a sound financial position as reflected by the amount
of net working capital but it has difficulty in meeting its short-term commitments. For
this purpose cash flow statement is prepared and its analysis is conducted to assess the
ability of the firm to meet its obligations to trade creditors, bankers and to pay interest to
debenture holders and dividend to its shareholders. Cash flow analysis takes a more
conservative approach about the liquidity position of the firm by taking a limited view of
the pool of the funds available to the firm. It is cash and cash equivalent items only that
form the liquidity position of the firm according to this view.

Yamaha’s cash flow statement is as follows:

31st DEC' 31st DEC' 31sT DEC'

A. Cash Flow from Operating
Loss for the year before extra
Ordinary expenditure but
After prior expenses -116.88 -39.02 -148.01
Depreciation 34.43 30.01 29.93
Interest n prepayment charges 29.58 24.39 53.8
Loss on sale of assets 0.19 0.15 0.3
Provision for doubtful debts 3.9 1.92 0.63
Provision for doubtful advances 0.34 0.6 2.38
Assets written off 2.4
Operating profit before
Working capital changes -46.04 18.05 -60.97
Adjustments for:-
Inventories -52.49 35.7 36.06
S.debtors 4.62 -42.39 -39.96
Current liabilities -20.95 -6.82 -31
Provisions -1.62 2.03 3.96
Other current assets -1.52 -8.72 0.7
Loans n advances 2.67 -2.1 8.72
Direct taxes receipt/(paid) 0.11 1.23 -0.55
Cash flow from operations -115.22 -3.02 -83.04

Adjustments for:-
Movement in deferred revenue
Expenditure -2.2 5.86 -12.02
ACTIVITIES -117.24 2.84 -95.06


Purchase of fixed assets -21.07 -27.73 -57.34
Sale/disposal of fixed assets 0.44 0.44 0.68
Purchase of shares in subsidiary
co. - -0.1 -


ACTIVITIES -20.63 -27.39 -56.66


Interest -29.58 -25.43 -52.53
Proceeds from shares receipts/
Conversion of loan into equity - - 400
Proceeds from borrowings 162.44 -21.58 -128.16


ACTIVITIES 132.86 -47.01 219.31

Increase/Decrease in cash n
D cash
Equivalents -5.01 -71.56 67.59
E Cash n cash equivalents as at the
Beginning of the year 10.64 82.2 14.61
F Cash n cash equivalents as at the
Close of the year 5.63 10.64 82.2

Analyzing Yamaha’s cash flow statement we will find that there has been a tremendous
decrease in the cash balance of the firm. Cash balance at the end of year 2005 has gone
down by half as compared with the closing balance of 2004 and has become one-
fourteenth of what it was in 2003. The firm’s liquidity position is not as strong as was
depicted by net working capital.

There is no proper balance between various sources of cash rather there is just one source
of cash inflows. There has been a loss on account of operations of the business and the
loss has been as high as Rs 117.24 crores in 2005. Most of the cash inflows are a result of
financing activities such as proceeds from borrowing, conversion of loan into equity,
proceeds from share receipts etc.
The firm should try to bring about a proper balance between various sources of cash
before it gets too late. Instead of depending upon the financing activities to generate cash
and also absorb the loss from operating activities, the firm should try to generate funds
through operating and investing activities. The least it can do is to minimize the loss from
operating activities. If the firm keeps on raising funds from financing activities it will
have an adverse effect on the prices of shares and also it will have trouble in raising loans
in the future.

The term inventory refers to the stockpile of the products a firm is offering for sale and
the components that make up the product. In other words, inventory is composed of
assets that will be sold in future in the normal course of business operations. The assets
which firms store as inventory in anticipation of need are: (i) raw materials, (ii) work-in-
progress, (iii) finished goods.

Reasons for holding inventory: firm holds each type of inventory for different reasons. A
manufacturing firm may have inventories at different stages in the production process:

1. Inventories of raw materials are held to ensure that the production process is not
disrupted by a shortage of these materials. The amount of raw material inventory
held will depend on:
• The speed with which the firm can re-stock raw materials, the greater the
speed, the lower the required inventory for raw materials.
• The uncertainty in the supply of these raw materials; the larger the
uncertainty, the greater the need for inventories of these materials.
2. Inventories of partially finished goods (W-I-P) arise in the process of production.
As the production process becomes more complicated and lengthier, the W-I-P
inventory will also increase.
3. Inventories of finished goods arise because of the time involved in the production
process and the need to meet customer demand promptly. The magnitude of the
finished goods inventory will depend on:
• The time it takes to fill an order from a customer. If orders cannot be filled
quickly and at a low cost, the firm will maintain a large finished goods

inventory. A clothing manufacturer, for instance, can maintain a lower
inventory than an automobile manufacturer because it can meet sudden
demand much more easily.
• The diversity of the product line. Firms that sell a range of goods generally
need to invest more in finished goods inventory than do firms that have a
single line or only a few lines of goods.
• The strength of competition. When competitors offer close or perfect
substitutes at similar prices, the firm is much more likely to suffer from
lost sales if it does not have sufficient inventory.

Costs of holding inventory

One operating objective of inventory management is to minimize cost. Excluding the cost
of merchandise, the costs associated with inventory fall in to two basic categories:
ordering or acquisition cost and carrying costs.

Ordering costs: this category of costs is associated with the acquisition or ordering of
inventory. Firms have to place orders with suppliers to replenish inventory of raw
materials. The expenses involved are referred to as ordering costs. Included in the
ordering costs are costs involved in (i) preparing a purchase order or requisition form and
(ii) receiving, inspecting, and recording the goods received to ensure both quantity and
quality. These are generally fixed per order placed, irrespective of the amount of the
order. The larger the orders placed, or the more frequent the acquisition of inventory
made, the higher such costs.

Carrying costs: these can be divided into two categories:

• Those that arise due to the storing of inventory. The main components are
(i) storage cost, that is, tax, depreciation, insurance, maintenance of
building; (ii) insurance of inventory against fire and theft; (iii) serving
costs, such as, labour for handling inventory, clerical and accounting costs.
• The opportunity cost of funds: this consists of expenses in raising funds
(interest on capital) to finance the acquisition of inventory. If funds were

not locked up in inventory, they would have earned a return. This is the
opportunity cost of funds or the financial cost component of the cost.

There are various methods of determining the optimal level of inventory:

1. A B C System: the first step here is to classification of different types of
inventories to determine the type and degree of control required for each. This
technique is based on the assumption that a firm should not exercise the same
degree of control on all items of inventory. It should rather keep a more rigorous
control on items that are (i) the most costly, and/or (ii) the slowest turning, while
items that are least expensive should be given less control effort. Inventories are
classified into three classes: (i) A (ii) B and (iii) C. The items included in-group A
involves the largest investment. Therefore, inventory control should be the most
rigorous and intensive and the most sophisticated inventory control techniques
should be applied to these items. The C group consists of items of inventory,
which involve relatively small investments although the number of items is fairly
large. These items deserve minimum attention. The B group stands midway. The
task of inventory management is to properly classify all the inventory items.
However, it should be used with caution.
2. Economic Order Quantity Model: EOQ refers to the optimal level of inventory
that should be ordered every time so as to keep the entire cost minimum. It is
based on the assumption that the firms know with certainty its annual usage of a
particular item of inventory; the rate at which the firm uses inventory is steady
over time. EOQ can be determined either through a trial and error approach or
through a simple mathematical approach.

In order to understand Yamaha’s inventory position, we will study the inventory turnover
ratio, the inventory holding period; break up of inventory into various sub parts etc.

Inventory constitutes an important part of the total working capital. Many a firm in actual
practice faces serious problems due to slow moving out-dated inventory. Inventory, is an
essential item in the business operations. But if too much amount is invested in this for

too long, it poses a serious threat to the profitability as well as solvency of the concern.
The ratios that are normally being used as indicators of the quality of management
exercised over inventory as a whole and its parts are as follows:
Overall inventory turnover ratio: inventory (stock) turnover reflects the efficiency with
which the inventory is being managed in the concern. It’s calculated by dividing the cost
of goods sold by average inventory. Thus,

Inventory turnover = Cost of Goods Sold

Average inventory
Many a times the figure of net sales is used in the numerator, as the figure of cost of
goods sold is not generally available in the financial statements.

This ratio indicates the way management has used inventory to conduct the operations of
the business. It shows how rapidly the inventory is being turned into sales. A low
turnover implies an excessive level of inventory than warranted by production or sales
operations. This may also indicate the presence of slow moving or obsolete inventory.

Yamaha’s inventory turnover ratio for the various years is as follows:

Yamaha Bajaj
Particulars 2008 2009 2010 2008 2009 2010

COGS 727.97 970.69 861.83

Average inventory 144.02 111.62 120.115
Inventory turnover
5.05 8.70 7.18
Average holding
72.21 41.97 50.87

As can be seen, the inventory turnover ratio has gone up as compared to 2003. Inventory
has converted into sales faster in 2005 as compared to 2003.

Another useful way to evaluate how inventory management is done in the concern is to
look at the average period for which inventory is being held. Average holding period of
inventory can be calculated by dividing the number of days in a year (365) by inventory
turnover ratio.

Average holding period = 365/ inventory turnover

= (365 x average inventory)/cost of good sold
= Average inventory/COGS per day

Normally, a lower holding period reflects efficient utilization of inventory by

management. That is, it indicates that inventory is held for shorter duration in the godown
and is fast converted into receivables/cash through sale. But management must be
cautious in aiming for too low a holding period. This is because with too low inventory
holding period, the management may risk its product going out of market if some
disruption occurs in its production schedules. And this may prove costly. Again, too high
an inventory-holding period is not considered good due to its impact on profitability and
liquidity of the concern. If inventory is held for a longer duration than desired, more
funds will be locked up earning nothing.

In 2003, Yamaha’s holding period was very large; it was almost seventy-two days
whereas in 2004 it was low at forty-two days. In 2005, it was fifty-one days and we can
say that this is the appropriate holding period as it is neither too large nor too small.

Apart from the turnover and holding period of overall inventory, management might be
further interested to know about the efficiency with which various types or components
of inventory have been used. Inventory comprises raw material, work-in-process, finished
goods and spare parts etc... All the components should form a reasonable part of the total
inventory. Therefore, all components should be related individually to the total inventory
to find out the proportion of each of them. The following ratios are used for this purpose:

Raw Material Inventory Turnover

This ratio reflects the way raw materials have been used in the business as compared with
its average inventory stock during the year. It is calculated by dividing the raw materials
consumed during the year by average balance of raw material inventory during the year.

Raw material inventory

Turnover = raw materials consumed during the year
Average raw material inventory

It indicates the rate of utilization of raw material. A higher turnover ratio of raw material
inventory over a period of time indicates its increasing utilization. But too high a ratio
may indicate that proportionately less raw materials were held in order to carry out the
production which may be quite risky.

Another way to indicate efficiency of raw material is to express it in terms of number of

days of holding raw material turnover ratio

Raw materials holding period = 365/ raw material inventory turnover


The expression of the efficiency of raw material i.e., raw materials storage period in
terms of days can be compared with the predetermined standard set up by management or
with the industry standard or with the past performance.

Raw material Average age of raw material

Years turnover ratio inventory
2003 7.45 49 Days
2004 13.35 27.34 Days
2005 13.23 27.59 Days

Yamaha’s raw material inventory turnover ratio has increased over the past three years;
rather it has almost double since 2003. Yamaha’s inventory of raw materials on an

average turned 13.23 times a year in 2005 compared to only 7.45 times a year in 2003.
The higher turnover ratio over the years indicates increasing utilization of raw materials.

The raw material holding period has been 27 to 28 days for 2004 and 2005. This implies
that on an average the company holds stock of raw materials for about 27 to 28 days. It
was very high for year 2003(49 days). The firm has drastically improved its holding
period for raw material inventory.

Work-in-process inventory turnover

This ratio establishes a relationship between the value of goods produced and the value of
average work-in-process.

Work-in-process inventory = cost of goods manufactured

Turnover average W.I.P. inventory

A higher turnover ratio indicates lower inventory accumulation and lesser tied-up
working capital. A falling turnover means either the management has become lax in
controlling the productive processes or some external factors have retarded the
production movement at its final turn-up.

If work-in-process inventory turnover ratio is divided into the number of days in a year it
will give the conversion period, which can be compared with some standard.

Conversion period = average W.I.P inventory

(In number of days) cost of goods manufactured per day

Average age of W-I-P

Years W-I-P turnover ratio inventory
2003 90.42 4.04 Days
2004 113.53 3.22 Days
2005 114.76 3.19 Days

Over the past few years Yamaha has become more efficient in work-in-process inventory
management. The work-in-process inventory turnover ratio has continuously been
increasing over the years and this trend is likely to remain for certain time. In 2005, the
company’s turnover ratio was 114.26(times) indicating that in the entire year 114.26
times work-in-process inventory is converted into finished goods inventory. This
turnover ratio was 90.42 in 2003. Thus it can be clearly seen that in the past two years
there has been lower inventory accumulation and lesser working capital was tied-up.

However, there has not been much change as far as number of days for which work-in-
process inventory is held. Earlier it was around four days and recently it has been around
three days.

Finished goods inventory turnover

There is a limit to the period for which finished goods should be in store. If the finished
goods are turned over faster, the amount of locked-up funds would be less; otherwise it
will be more. It is for this purpose that finished goods inventory turnover ratio is

Finished-goods inventory = cost of goods sold

Turnover average finished goods inventory

The same can be converted into finished goods storage period if the number of days in a
year is divided by the finished goods inventory turnover ratio.

Finished goods storage period = average finished goods inventory

(In number of days) cost of goods sold per day

Generally, lower storage period is considered good. But, too low a storage period is risky.

If we will have a look at Yamaha’s finished goods turnover ratio, we will find that in
2004 the company’s turnover ratio doubled as compared to 2003 but it again reduced in

2005. Also the number of days for which finished goods were stored was less in 2004 as
compared to other years. It was around 15 days in 2004 as compared to 28 days in 2001
and 23 days. One obviously wonders what the reason is for the increase in finished goods
holding period in 2005.

Finished goods turnover Average age of finished goods

Years ratio inventory
2003 12.83 28.45 Days
2004 24.423 14.94 Days
2005 15.51 23.53 Days

It can be said that this change or this increase in the number of storage days of finished
inventory or decrease in the finished goods turnover ratio is probably because the firm
had found it riskier to maintain such a high turnover ratio. It is quite possible that the firm
had faced problems in meeting the demand of motorcycles because it did not had
sufficient amount of finished goods inventory and thus in order to avoid a similar
problem in future it has decided to maintain the finished goods turnover ratio at a
reasonable figure, which is neither too low nor too high.

Yamaha’s current policy as regards Inventory can be stated as follows:

At Yamaha, inventories are divided into six main components namely raw materials,
work-in-process, finished goods, goods in transit, stores and spares and tools, jigs and
dies. Inventories are valued at the lower of cost and net realizable value. The basis for
determining cost for various categories of inventories is as follows:
→ Raw materials, components, stores and machinery spares on weighted average cost.
→ loose tools: purchased loose tools are valued at weighted average cost; manufacturing
loose tools are valued at material cost (plus appropriate share of labour and other
overheads including depreciation.)
→ W-I-P and finished goods on material cost (plus appropriate share of labour and other
overheads including depreciation.)

→ jigs, dies and fixtures. Here the original purchase cost is written off over a period of
nine years from the year of purchase.
Provision for obsolescence relating to slow moving/non moving inventories is determined
based on management’s assessment and is charged to p/l account.
If we will study the break-up of inventory we will find that as far as inventory in absolute
terms of work-in-process, goods in transit, stores and spares, tools, jigs and dies is
concerned its more or less stable over the year. Inventory of finished goods do fluctuate
over the year. It goes up during the months of July and august and comes down during
November and December. Inventory of raw materials also fluctuate but the fluctuation is
less volatile than that of finished goods.

The fact that finished goods constitute a major portion of inventory is also very clear
from the ratio of finished goods to inventory. Finished goods constitute almost fifty five
percent of inventories in 2005. The ratios of various components of inventory-to-
inventory are as follows:

2003 2004 2005

Stores n spares to
inventory 0.118 0.149 0.111
Raw material to inventory 0.441 0.453 0.299
W-I-P to inventory 0.056 0.082 0.034
Finished goods to
inventory 0.385 0.316 0.557

Another important point to be considered is that ratio of raw material to inventory has
gone down from forty four percent in 2003 to just thirty percent in 2005.

Thus, it can be concluded that basically changes in the level of inventory are caused by
changes in the level of inventory of finished goods and to some extent by the level of
inventory in raw materials.
In general, level of inventory is high during July and august and low during October and
November. However, in 2005 the trend of inventory was completely opposite to as what
it was in 2004.

Break up of inventory for 2004:


Goods 51.05 48.81 48.94 44.69 41.3 38.3 58.94
Progress 8.36 7.21 7.21 7.21 7.21 7.21 6.3
Materials 60.23 46.63 42.53 38.75 38.29 35.72 37.45
Goods in
Transit 4.29 4.75 5.06 5.19 6.69 6.15 5.05
Stores n
spares 11.18 10.71 9.45 9.56 10.03 10 10.9
Tools, jigs n
dies 52.52 44.63 44.41 44.21 43.71 43.71 44.78

TOTAL 187.63 162.74 157.6 149.61 147.23 141.09 163.42


Finished Goods 58.5 52.47 44.51 33.06 29.39
Work-in-Progress 6.3 6.3 6.3 6.3 6.26
Raw Materials 37.65 36.39 33.27 33.01 34.44
Goods in Transit 6.32 7.14 10.73 6.24 6.71
Stores n spares 10.7 10.87 10.67 10.85 11.11
Tools, jigs n dies 44.86 44.87 44.9 44.91 43.59

TOTAL 164.33 158.04 150.38 134.37 131.5

Similarly, break up of inventory for 2005 is as follows:


Goods 90.9 109.56 123.95 125.3 162.63 169.69 157.12
Progress 7.71 7.71 7.71 8 8.51 8.19 8.13
Materials 34.49 35.58 32.99 36.63 40.93 41.34 40.84
Goods in 9.51 8.35 12.83 9.54 4.14 4.31 4.48

Stores n
spares 10.54 10.62 9.89 11.23 11.72 11.34 11.26
Tools, jigs n
dies 48.35 48.51 48.53 47.97 47.98 48.07 48.11

TOTAL 201.5 220.33 235.89 238.67 275.91 282.94 269.94


Finished Goods 134.85 113.72 83.29 109.66 83.15
Work-in-Progress 8.13 8.13 8.13 8.13 3.09
Raw Materials 40.03 41.16 39.79 42.98 43.85
Goods in Transit 6.58 5.45 4.48 2.44 1.75
Stores n spares 11.34 11.21 11.61 11.98 12.23
Tools, jigs n dies 48.43 48.46 49.22 49.98 49.84

TOTAL 249.36 228.13 196.52 225.17 193.91

This break up can also be shown in the form of a graph for the two years separately as



Apart from this, the total month-wise break up of inventory for the two years 2004 and
2005 can be shown in the same graph to compare the movement of inventory in the two


It can be seen from the above diagram that inventory follows a completely different
movement in 2005 as compared to 2004. The reason for this is that in 2005 the company

has increased its production. Moreover sales have not increased at the same pace as
production and as a result inventory of finished goods has increased.
Thus, in conclusion we can say that the firm has improved its utilization of inventory. It
should concentrate more on finished goods inventory as that is the most important
component of inventory and that is where the problem still lies.


The term receivables is defined as ‘debt owed to the firm by customers arising from sale
of goods or services in the ordinary course of business’. When a firm makes an ordinary
sale of goods and services and does not receive payment, the firm grants trade credit and
creates accounts receivable which could be collected in future. Receivables credit is also
called trade credit management. Thus, accounts receivable represent an extension of
credit to customers, allowing them a reasonable period of time in which to pay for the
goods received.

As a marketing tool, they are intended to promote sales and thereby profits. However,
extension of credit involves risk and cost. Management should weigh the benefits as well
as cost to determine the goal of receivables management. The objective of receivables
management is ‘to promote sales and profit until that point is reached where the return on
investment in further funding receivables is less than the cost of funds raised to finance
that additional credit’.

Three crucial aspects of management of receivables are: credit policies, credit terms and
collection policies.


The credit policy of a firm provides the framework to determine whether or not to extend
credit to a customer and secondly how much credit to extend. The credit policy decision
of the firm has two broad dimensions: credit standards and credit analysis.

Credit standards: they represent the basic criteria for the extension of credit to
customers. The quantitative basis of establishing credit standards are factors such as
credit ratings, credit references, average payments period and certain financial ratios. The
standards can be divided as (a) tight or restrictive, and (b) liberal or non restrictive. The
trade off with reference to credit standards covers the following factors:

1. Collection costs: the implications of relaxed credit standards are: more credit; a
large credit department to service accounts receivable and related matters;
increase in collection costs. The effect of tightening of credit standards will be
exactly the opposite. These costs are likely to be semi-variable.
2. Investments in receivables or the average collection period: the investment in
receivables involves a capital cost, as funds have to be arranged by the firm to
finance them till customers make payments. The higher the average accounts
receivable, the higher is the capital or carrying cost. A change in the credit
standards-relaxation or tightening-leads to a change in the level of accounts
receivable either (a) through a change in sales, or (b) through a change in
A relaxation in credit standards implies an increase in sales, which, in tur
n, would lead to higher average accounts receivable. Further, relaxed standards
would mean that credit is extended liberally so that it is available to even less
credit-worthy customers who will take a longer period to pay overdue and this

would result in higher level of account receivable. A tightening of standards will
have an opposite effect.

3. Bad debt expenses: they increase with relaxation in credit standards and decrease
if credit standards become more restrictive.
4. Sales volume: as standards are relaxed, sales are expected to increase; conversely,
a tightening is expected to cause a decline in sales.

Cost of marginal/incremental investment in receivables

The second variable relevant to the decision to relax credit standards is the cost of
marginal investment in accounts receivable. Marginal investments represent the amount
of additional funds required to finance incremental accounts receivable if the proposal to
relax the credit standards is implemented.

The credit analysis: the second aspect of credit policies of a firm is credit analysis and
investigation. Two basic steps involved in the credit investigation process: (a) obtaining
credit information, and (b) analysis of credit information. Credit information can be
obtained either internally or externally through financial statements, bank references,
trade references etc. once the information has been collected, it should be analyzed to
determine the credit-worthiness of the applicant. The analysis should cover two aspects:
(i) quantitative (ii) qualitative.


After the credit standards have been established and the credit worthiness of the
customers has been assessed, the management of the firm must determine the terms and
conditions on which trade credit will be made available. The stipulations under which
goods are sold on credit are referred to as credit terms. Credit terms have three
components: (i) credit period, in terms of the duration of time for which trade credit is
extended-during this period the overdue amount must be paid by the customer; (ii) cash
discount, if any, which the customer can take advantage of, that is, the overdue amount

will be reduced by this amount; and (iii) cash discount period, which refers to the
duration during which the discount can be availed of.

The credit terms, like the credit standards, affect the profitability as well as the cost of a

Credit period: an increase in the credit period results in an increase in sales volume,
average collection period and bad debt expenses. While increase in sales volume results
in an increase in profits the other two have an adverse impact on profits. A reduction in
the credit period is likely to have an opposite effect.

Cash discount: the implications of increasing or initiating cash discount are as follows:

1. The sales volume will increase.

2. Since the customers, to take advantage of the discount, would like to pay
within the discount period, the average collection period would be reduced.
3. The discount will have a negative effect on the profits.
4. Bad debt expenses will also go down.


These refer to the procedures followed to collect accounts receivable when, after the
expiry of the credit period, they become due. These policies cover two aspects: (i) degree
of effort to collect the overdues, and (ii) type of collection efforts.

Degree of collection effort: the collection policy would be tight if very rigorous
procedures are followed. A tight collection policy has implications which involve
benefits as well as costs. In the first place, the bad debt expenses would decline.
Moreover, the average collection period will be reduced. As a result of these two effects,
the firm will benefit and its profits will increase. But, there would be a negative effect
also. A very rigorous collection strategy would involve increased collection costs. Yet

another negative effect may be in the form of a decline in the volume of sales. The effect
of the lenient policy will be just the opposite.

Type of collection efforts: the second aspect of collection policies relates to the steps
that should be taken to collect overdues from the customers. A well-established collection
policy should have clear-cut guidelines as to the sequence of collection efforts. After the
credit period is over and payment remains due, the firm should initiate measures to
collect them. The effort should in the beginning be polite, but, with the passage of time, it
should gradually become strict. The steps usually taken are (i) letters, including
reminders, to expedite payment; (ii) telephone calls for personal contact; (iii) personal
visits; (iv) help of collection agencies; and finally, (v) legal action. The firm should take
resource to very stringent measures, like legal action, only after all other avenues have
been fully exhausted. They not only involve a cost but also affect the relationship with
the customers.

In order to know Yamaha’s strategy regarding debtors we will study ratios like debtors
turnover ratio, average collection period of the firm, the proportion of current assets that
is held in the form of receivables and also the month- wise break up of debtors to
understand the movement of debtors across the year.

Receivables (debtors) Turnover Ratio

With the increasing competition in the business, management sometimes offers liberal
credit terms to its customers, thereby increasing sales and total profits. Thus, the number
of times the management is able to turn the receivables into sales indicates the efficiency
with which the receivables are being managed. The debtors turnover ratio is a test of the
liquidity of the debtors of the firm.

Debtors turnover ratio = total sales/ credit sales

Average receivables

A low turnover ratio is an indicator of the firm’s increased reliance on credit sales in its
marketing efforts. If this is not backed up by timely and efficient collection of
receivables, it may jeopardize the solvency of the firm.
For getting additional into the managerial aspects of receivables, this ratio can be divided
into the total number of days in a year, to give average collection period.

Average collection period = 365 x average receivables

Total sales

Average collection period indicates the number of days for which receivables remain
uncollected. It is not very prudent for a firm to have either a very short collection period
or a very long one. A very long collection period would imply either poor credit selection
or an inadequate collection effort. The delay in the collection of receivables would mean
that, apart from the interest cost involved in maintaining a higher level of debtors, the
liquidity position of the firm would be adversely affected. Moreover, there is the
likelihood of a large number of accounts receivables becoming bad debts. Similarly, too
short a period of average collection or too high a turnover ratio is not necessarily good.
While it is true that it avoids the risk of receivables being bad debt as well as the burden
of high interest on outstanding debtors, it may have an adverse effect on the volume of
sales of the firm. Sales may be confined only to such customers as make prompt
payments. The credit and collection policy of the firm may be very restrictive. Without
reasonable credit sales will be severely curtailed. Thus, a firm should have neither very
low nor very high receivables turnover ratio.

Debtors Average collection

Years turnover ratio period
2003 9.93 36.3 Days
2004 11.01 33 Days
2005 7.6 48 Days

Yamaha’s turnover ratio was 9.93, 11.01, and 7.6 for the years 2003, 2004 and 2005
respectively. This indicates that debtors were converted into cash 11 times in the year

2004, 10 times in the year 2003 and around 8 times in the year 2005. The average
collection period has been 36, 33 and 48 days for the years 2003, 2004 and 2005
respectively. One thing can be clearly seen that the average collection period has gone up
by almost 12 to 15 days in 2005. This indicates that recently the firm has followed a more
liberal policy of extending trade credit and also delayed payments by debtors. Moreover,
we can also examine this in relation to the credit terms and policy of the firm itself.
Yamaha usually gives a credit for a period of 30 days. Now if we compare, we will find
that the firm is not able to collect its receivables well within the due dates. The debtors
are outstanding for a period longer than warranted by the firm’s credit policy. This
reflects the inefficiency of the credit collection department; it has made either poor credit
selection or inadequate collection effort. The firm can reduce its average collection
period considerably by availing the facilities provided by the banks.

Another ratio used is proportion of receivables to current assets.

Years Debtors to CA ratio

2003 0.27
2004 0.497
2005 0.397

This ratio basically helps in understanding the shifts and changes that occur over the
years in receivables as compared to the current assets. It can be said that this ratio has
increased over time but a word of precaution is that it should not go any further than fifty
percent of the current assets.

Yamaha’s current policy as regards debtors can be stated as follows:

The firm offers different credit terms to different customers. The time period for which it
extends credit varies from between one to thirty days to over one twenty days, the most
common being one to thirty days. The firm’s average collection days varies between
thirty to forty-five days as shown by the calculations.

Around ten to fifteen percent of Yamaha’s sales are exports. Out of this percentage nearly
ninety percent (90%) is done to the parent company, Yamaha Japan which then further
sell it to other clients and the rest ten percent (10%) is done to neighboring countries like
Bangladesh, Sri Lanka etc.. In this case the credit policy is to receive payments within
thirty days from the receipt of document by the other party.

Remaining ninety percent (90%) of the total sales are domestic sales. Here Yamaha offers
different credit period to its dealers depending upon factors like its relationship with
them, their liquidity position, their past records as regards payments etc. At any time of
the year that is in any month sixty-five percent (65%) of the dealers are outstanding for a
period of one to thirty days, twenty-three (23%) for a period of thirty to sixty days and
around six percent (6%) each for up to ninety days and over one-twenty days.
In order to understand the trend of how debtors or receivables move in a given year, it is
necessary to study the month wise break up of debtors. Based on this break-up, estimates
for the amount that will be required in future for investment in receivables can be made.
It also helps in knowing the months of peak and sluggish demand respectively.
The usual trend in an automobile industry is that sales are highest during months of
October and November and lowest in the months of July and August. The same trend has
been found in Yamaha and since higher the sales, higher the debtors and vice-versa, the
debtors are also expected to follow the same trend as sales. The reason for high sales in
the months of October and November is the festive season. During the festive season
there are lots of offers in terms of cash discounts or free insurance for one year or interest
subsidy and people usually wait for a while (one or two months) to avail these benefits.
Thus, before the festive season the demand and sales are generally lower. The sales are
lowest in the months of July and August because in these months there is a lot of
transportation problem due to the rainy season.
Another important thing is that better the monsoons better the chances of sales going up
in the rural areas as motorcycles are the most preferred two-wheeler vehicles here. This is
because better the monsoons better the chances of agricultural growth and better the

procurement prices and more the disposable income in the hands of the people of rural
On an average, investment in receivables in 2005 has been higher as compared to 2004.
Break up of debtors for the year 2004:
EXPORTS 8.5 10.41 12.01 11.02 15.04 16.1 16.79
(A) 1 TO 30 DAYS 48.84 57.08 69.67 56.96 49.58 46.77 39.1
(B) 31 TO 60 DAYS 17.62 20.59 25.15 20.56 17.95 16.93 14.15
( C) 61 TO 90 DAYS 4.32 5.05 6.16 5.04 4.39 4.14 3.46
(D) 91 TO 120 DAYS
(E) OVER 120 DAYS 4.16 4.86 5.93 4.85 4.22 3.98 3.33

RECEIVABLES 83.44 98 118.92 98.43 91.18 87.92 76.83


EXPORTS 22 18 23 21.01 18.34
(A) 1 TO 30 DAYS 44.15 55.35 67.72 77.23 66.76
(B) 31 TO 60 DAYS 15.98 20.03 24.52 27.96 24.17
( C) 61 TO 90 DAYS 3.91 4.9 6 6.84 5.91
(D) 91 TO 120 DAYS
(E) OVER 120 DAYS 3.76 4.71 5.76 6.57 5.68

RECEIVABLES 89.8 103 127 139.61 120.86

Break up of debtors for 2005


EXPORTS 19.8 25.98 26.9 24 23.79 25 25
(A) 1 TO 30 DAYS 47.77 60.49 57.38 56 82.16 76.65 66.43
(B) 31 TO 60 DAYS 17.3 21.91 23 23 29.74 27.75 24.05
(C ) 61 TO 90 DAYS 4.23 5.36 5.45 5.4 7.28 6.79 5.88
(D) 91 TO 120 DAYS
(E) OVER 120 DAYS 4.06 5.14 5.7 5.65 6.98 6.51 5.64

TOTAL 93.16 118.87 118.43 114.05 149.95 142.7 127



EXPORTS 15 12 9 4 6
(A) 1 TO 30 DAYS 78.15 111.36 113.97 88.57 75.54
(B) 31 TO 60 DAYS 28.29 40.32 41.26 32.06 27.35
( C) 61 TO 90 DAYS 6.92 9.86 10.09 7.84 6.69
(D) 91 TO 120 DAYS
(E) OVER 120 DAYS 6.64 9.46 9.68 7.52 6.42

RECEIVABLES 135 183 184 140 122

This movement of debtors can also be shown in the form of graph as follows:


We can also determine the relationship between the debtors of a firm and the firm’s

inventory. This will be further clear from the following two diagrams:


Relationship between debtors and finished goods












Relationship between debtors and finished

goods 2003















Ideally debtors and inventory move in opposite directions. When sales are high debtors
are high but inventory is low and similarly when sales are low debtors are low but
inventory is high. Thus, the investment in debtors and investment in inventories are
inversely related. In 2004, the firm’s debtors and inventory move in the opposite
direction but as we can see in 2005, debtors and inventory of finished goods move almost
in the same direction till the month of September. The reason for this could be that the
company is producing more finished goods each month than is being actually sold and as
a result inventory of finished goods is getting accumulated and going up. Now since we
producing more, we must be purchasing more raw materials and therefore the creditors
for the period should also be going up. However, if we see the creditors trend for 2005,
we will find that instead of increasing they have been going down for months of April to
August. This implies that are purchases have not gone up. Thus, it is the debtors that are
not going down and the reason for this is that the company is not able to collect its
receivables on time.

Thus, it can be concluded that though the firm had been managing its receivables well,
recently there has been an increase in the average collection period. The firm should try
to bring this down as it directly affects the operating cycle, which in turn affects the cash,
or the working capital cycle.


Creditors are a vital part of effective cash management and should be managed carefully
to enhance the cash position.

In order to understand Yamaha’s payables it is necessary to analyze the various ratios

such as creditors turnover ratio, the average payment period, the ratio of current liabilities
to total liabilities and so on.

Payables/creditors turnover ratio

Accounts payables and creditors constitute an important source to provide spontaneous
working capital finance for the firm. To what extent management is able to use it
properly is an important area worth probing.

Payables turnover ratio = annual purchases
Average payables
Payables turnover ratio expresses the number of times accounts payables are converted
into purchases by management during the year. Normally, a higher turnover ratio is
preferred. This means that with a smaller amount of payables, management could
purchase more material during the year. This, therefore, reflects efficiency on the part of
the management.
A variant of this ratio is average payment period.

Average payment period = 365(days in a year)

Payable turnover ratio

This can be observed for a period of time to find out how management has fared on this

Creditors Average payment

Years turnover ratio period
2003 4.11 88.8 Days
2004 5.43 67.24 Days
2005 5.23 69.4 Days

Yamaha’s creditors turnover ratio has increased over time but still it is not very high.
Moreover its average payment period has come down from around eighty nine days to
seventy days.

If we examine the ratio of current liabilities to total liabilities we will find that over the
years this ratio has been more or less the same. Current liabilities form fourteen percent
of the total liabilities.

Years CL TO TL ratio
2003 0.147

2004 0.144
2005 0.142

The month wise break up of creditors of Yamaha for the years 2002 and 2003 is as
2004 2005

JANUARY 53.44 77.57

FEBRUARY 61.38 75.21
MARCH 65.62 73.84
APRIL 82.21 69.05
MAY 82.21 67.05
JUNE 89.89 51.55
JULY 89.89 39.87
AUGUST 63.7 47.47
SEPTEMBER 75.92 78.49
OCTOBER 90.94 75.21
NOVEMBER 87.79 77.83
DECEMBER 60.34 34.76

This data can also be depicted in the form of a line diagram:


As can already been seen, Yamaha’s creditors have fluctuated widely not only month-
wise but year wise as well. Creditors have followed an entirely different direction in the
beginning of 2005 as compared to 2004 and moreover the increase or decrease in 2003
has been much more as compared to 2004.

We can also show the relationship between inventory, receivables and creditors.





Similarly for 2005,


It is very evident from the above two figures that creditors movement is more or less
similar to that of the debtors. Though at certain points it moves in the opposite direction
of debtors the magnitude is not very large. Based on this we can conclude that the debtors
and creditors are positively related whereas creditors and inventory are negatively related.

Since we have already discussed the various aspects of working capital such as inventory,

receivables and payables we can now discuss the concept of operating cycle and cash or
working capital cycle.

Operating cycle
Days of operating cycle (DOC) refer to the time period between the acquisition of
inventory and the collection of cash from receivables. It has two distinct components:
inventory period which is the time it takes to acquire and sell inventory and the accounts

receivable period which is the time between sale of inventory and collection of the
2003 2004 2005
1 Average age of inventory 81.49 Days 45.5 Days Days
2 average collection period 36.3 Days 33 Days 48 Days
3 average payable period 88.8 Days Days 69.4 Days

Days of operating 102.31

4 cycle(1+2) 117.8 Days 79 Days Days
5 Days of working cycle(4-3) 29 Days 12 Days 33 Days

Yamaha’s operating cycle has been more than 100 days except for the year 2004 when it
was only 79 days. The lesser the number of days, quicker is the conversion of inventory
and receivables into cash.

Working capital / cash cycle

Cash cycle is the difference between operating cycle and average payment period. In
other words, it is the time period from when cash is paid out to when cash is received.
The firm’s working cycle has been between 28 and 35 days except for the year 2004
when it was just 12 days. The increase in the cash cycle has been because of an increase
in the inventory and receivables period and a decrease in payables period. It can also be
said that the cash cycle has decreased because the company has been able to defer
payment of payables and thereby lengthen the payables period.
The longer the cash cycle, the more financing is required. Changes in the firm’s cash
cycle are often monitored as an early-warning measure. A lengthening cycle indicates
that the firm is having trouble moving inventory or collecting on its receivables.
Thus, it can be said that all other things being the same, the shorter the cash cycle is, the
lower is the firm’s investment in inventories and receivables. As a result, the firm’s total
assets are lower, and total turnover is higher.


The need for financing arises mainly because the investment in working capital/current
assets that is, raw materials, work/stock in progress, finished goods and receivables
fluctuates during the year. The main sources are mainly trade credit, bank credit,
factoring and commercial papers.

Trade Credit
Trade credit refers to the credit extended by the supplier of goods and services in the
normal course of transaction/business/sale of the firm. It is an informal arrangement
between the buyer and the seller. There are no legal instruments/acknowledgements of
debt, which are granted on an open account basis. Such credit appears in the records of
the buyer of goods as sundry creditors/accounts payable.

A variant of accounts payable is bills/notes payable. Unlike the open account nature of
accounts payable, bills/notes payable represent documentary evidence of credit purchases
and a formal acknowledgement of obligation to pay for credit purchases on a specified
(maturity) date failing which legal action for recovery will follow. Although most of the
trade credit is an open account like accounts payable, the suppliers of goods do not
extend credit indiscriminately. Their decision as well ad the quantum is based on factors
such as earnings record over a period of time , liquidity position of the firm and past
record of payment.

Its biggest advantage is that it is easily, almost automatically, available. Also it is a

flexible and spontaneous source of finance. Though it does not involve any explicit
interest charge, there is an implicit cost. It depends on the credit terms offered by the
supplier of goods. If the terms of the credit are, say, 45 days net, the payable amount to
the supplier of goods is the same whether paid on the date of purchase or on the 45 th day
and, therefore, trade credit has no cost, that is, it is cost free. But if the credit terms are,
say, 2/15, net 45, it implies that the firm (buyer) is entitled to 2 percent discount for
payment made within 15 days when the entire payment is to be made within 45 days.

Failure to take the discount means paying an extra 2 percent for using the money for an
additional 30 days. This represents an annual interest rate/cost of 24 percent. The smaller
the difference between the payment day and the end of the discount period, the larger is
the annual interest/cost of trade credit.

Bank Credit
It is the primary institutional source of working capital finance in India. It is the most
important source for financing of current assets. Banks in five ways provide working
capital finance:
1. Cash credit/overdrafts: under cash credit/overdraft form of bank finance, the bank
specifies a predetermined borrowing/credit limit. The borrower can draw/borrow
up to the stipulated credit /overdraft limit. Within the specified limit, any number
of drawls/drawings is possible to the extent of his requirements periodically.
Similarly, repayments can be made whenever desired during the period. The
interest is determined on the basis of the running balance/amount actually utilized
by the borrower and not on the sanctioned limit. However, a minimum charge
may be payable on the unutilized balance irrespective of the level of borrowing
for availing of the facility. It is attractive to the borrowers because it is flexible in
that although borrowed firms are repayable on demand, banks usually do not
recall cash advances/roll them over as secondly the borrower has the freedom to
draw the amount as and when required while the interest liability is only on the
amount actually outstanding. However it is inconvenient for the banks and
hampers credit planning. Cash credit cannot at present exceed 20 percent of the
maximum permissible bank finance to any borrower.
2. Loans: under this arrangement, the entire amount of borrowing is credited to the
current account of the borrower or released in cash. The borrower has to pay
interest on the total amount. The loans are repayable on demand or in periodic
installments. At least 80 percent of MPBF/credit limit must now be in the form of

3. Bills purchased/discounted: bank credit is made available through discounting of
usance bills by banks. The bill financing is intended to link credit with the sale
and purchase of goods and, thus eliminates the scope for misuse or diversion of
credit to other purposes. The amount made available under this arrangement is
covered by the cash credit and overdraft limit. Before discounting the bill, the
bank satisfies itself about the credit worthiness of the drawer and the genuineness
of the bill. The discount rates are fixed at lower rates than those of cash credit.
The discounting banker asks the drawer of the bill (i.e. seller of goods) to have his
bill accepted by the drawee (buyers) bank before discounting it. The latter grants
acceptance against the cash credit limit, earlier fixed by it, on the basis of the
borrowing value of stocks. Therefore, the buyer who buys goods on credit cannot
use the same goods as a source of obtaining additional bank credit.
4. Working capital term loans: under this arrangement, banks advance loans for 3-7
years repayable in yearly or half yearly installments.
5. Letter of credit: letter of credit is an indirect form of working capital financing
and bank assumes only the risk, the credit being provided by the supplier himself.
The purchaser of goods on credit obtains a letter of credit from a bank. The bank
undertakes the responsibility to make payment to the supplier in case the buyer
fails to meet his obligations. Thus, modus operandi of letter of credit is that the
supplier sell goods on credit/extends credit to the purchaser, the bank gives a
guarantee and bears risk only in case of default by the purchaser.

Commercial Papers
Commercial paper (CP) is a short term unsecured negotiable instrument, consisting of
usance promissory notes with a fixed maturity. It is issued on a discount on face value
basis but it can also be issued in interest bearing form. A CP when issued by a company
directly to the investor is called a Direct Paper. When CPs are issued by security dealers
on behalf of their corporate customers, they are called dealer paper. They buy at a price
less than the commission and sell at the highest possible level. The maturities of CPs can
be tailored within the range to specific investments.

It is a simple instrument and does not need any documentation. It is additionally flexible
in terms of maturities, which can be tailored to match the cash flow of the issuer. A well-
rated company can diversify its short-term sources of finance from banks to money
market at cheaper cost. The investors can get higher returns than what they can get from
the banking system. Companies, which are able to raise funds through CPs, have better
financial standing. As negotiable transferable instruments, they are highly liquid.

Factoring provides resources to finance receivables as well as facilitates the collection of
receivables. It can be broadly defined as an agreement in which receivables arising out of
sale of goods/services are sold by a firm (client) to the ‘factor’ (a financial intermediary)
as a result of which the title of the goods/services represented by the said receivables
passes on to the factor. Henceforth, the factor becomes responsible for all credit control,
sales accounting and debt collection from the buyer(s). In a full service-factoring concept
(without resource facility), if any of the debtors fails to pay the dues as a result of his
financial inability/insolvency/ bankruptcy, the factor has to absorb the loss.

Credit sales generate the factoring business in the ordinary course of business dealings.
Realization of credit sales is the main function of factoring services. Once a sale
transaction is completed, the factor steps in to realize the sales. Thus, the factor works
between the seller and the buyer and sometimes with the seller’s banks together.

Depending on the type/form of factoring, the main functions of the factor, in general
terms, can be classified into five:
1. Financing facility/trade debts,
2. Maintenance/administration of sales ledger,
3. Collection facility/of accounts receivable,
4. Assumption of credit risk/credit control and credit restrictions; and
5. Provision of advisory services.

Factoring has several advantages such as off-balance sheet financing, reduction of current
liabilities, improvement in current ratio, higher credit standing, improved efficiency,
reduction of cost and expenses etc.


In today’s increasingly competitive world, where the firms are trying their best to manage
their working capital requirements most effectively the role of Bank in helping the firm in
its Working Capital management has become of crucial importance. Today Banks not
only provide short term or working capital loans but also play a major role in receivables
and payables management. Thus the basic questions, which need to be addressed with
regard to Bank’s role, can be stated as follows:

- What facilities does/can the Bank provide the firm to reduce its days of working
cycle? i.e. what can the firm do to reduce firm’s average collection period and
increase its average payable period.
- How can the Bank help the firm in reducing the cost of Debtors and Creditors
without having an adverse impact on average collection and average payable
period respectively?

Before going ahead and discussing what the Bank can “do” and “not do” in receivables
and payables management, lets make certain facts clear about Banking infrastructure
available in India.

As far as Banking System is concerned we have 27 public sectors Banks, 10 private

sector Banks, 26 foreign Banks, large number of cooperative Banks, regional rural Banks.

The clearing system in predominantly paper based with over 10,000 clearing zones. Out
of this 15 major zone clearing is done by RBI and in the most of other by SBI and its

The major constraints in the entire procedure are geographically spread (banks all over
India), low levels of Banking automation and poor communication and postal

infrastructure. As a result of this there are delays receiving credits, uncertainty of
payments, Reconciliation issues, high potential and lots of administrative burden.


Yamaha’s Working Capital Management is basically done by Citibank. Citibank has been
playing a major role in Yamaha’s Working Capital Management and recently it has come
up several new products some of which will help Yamaha in reducing its cost of Debtors
and Creditors.

We will first discuss services related to receivables and then services related to payables:

Normally, the procedure in this cases as follows:

Financing- o/d



Make Present Ship

Sale Invoice ledger Goods

Active Collection Mgt Buyer

Yamaha or the client makes sales and on being presented invoice updates its a/c ledger
and ship goods to the dealer. For this it requires funding which the Bank does. This could
be either in the form of overdraft or bill based. After the agreed period Yamaha will
receive payments from the dealer (sales were credit sales) and then it will be reconcile

Thus the client’s/Yamaha’s needs can be stated as

▪ Invoice presentation to buyer ▪ follows up for payment (including due date reminder)
▪ dispute resolution ▪ funding ▪ reconciliation.

Though this process may look simple but in reality it’s very long and complicated process
particularly the collection management process. This is where in the Banks steps to
reduce the firm’s average collection period.

Initially what use to happen was that, the dealers used to send cheques to the company
through courier (the dealers are not always at same location). This process takes 2-3 days.
By the time the cheque gets cleared and funds are credited to the client’s a/c it takes
another 4-5 days. Thus the entire process of getting the cheque and depositing and getting
the funds credit to the a/c takes about 9-10 days. And if the dealer sends a draft payable at
Delhi (assuming the company is in Delhi and dealer is situated somewhere else) then this
entire process takes 4-5 days.

Now what the Bank has offered is that instead of dealers sending cheques/drafts to the
company, the Bank will directly collect cheques from the dealers. Citibank through its
own branches and tie up with correspondent banks offer to collect cheques drawn in more
than 2500+ locations and sent them for collection. This facility offered by the Citibank
helps the firm in reducing their average collection period considerably from usual 9-10
days (cheques) or 4-5 days (drafts) to 2-3 days. This is because the Bank Agent collects
the cheques from the day zero and deposits them in the Citibank branch or corresponding
Bank on that day itself. By the day zero evening only, the cheques are sent to clearing
house and then the entire process takes about 2 days. Thus there is reduction in average
collection period by almost 6-7 days in case of cheques and 2-3 days in case of drafts by
outsourcing B/R collection process to the Bank.

Another product/facility offered by the Citibank is purchase of client’s receivables.

In this the Bank buys client’s receivables and pay the client the discounted value (day
zero). The client continues its collection process as usual. On Day, the client pays Bank
1st installment and on Day B, the 2nd installment. Even if actual collection is less than the
installment sold, the client has to bear/borne the shortfall up to FLDG (first loss
deficiency guarantee) given by it and the rest has to be reimbursed by the Bank. This

facility offered by the bank enables companies to achieve off balance sheet treatment for
trade receivables. It is a kind of factoring facility, which is given by the bank to the firm.
The main benefit to the client in this is that firstly it is getting money on the very first day
and thus its funds are not stock up in Debtors for the usual 30 or 60 days as the case may
be. Though the Bank does charge firm for this facility, it should be kept in mind that the
presented value of discounted the firm will receive on the day zero will be almost equal
to or could even be more than the present value of funds that the firm will receive on
30th /60th day from the dealer. Thus it is definitely advantageous for the firm to get
discounted funds from bank on day zero (it can utilize these funds somewhere else).
Secondly, if there is default in payment by some debtors then the entire shortfall is not
borne by the client (only FLDG).

Moreover contigent liability for FLDG amounts only has to be reported as against
Balance Sheet.

Another advantage is that it does not disturb the clients existing structure for collection
and recover

Assigns Receivable

Citigroup Day o
Client Discounted value paid

Pay 1st Installment Day A

Client nd
Pay 2 Installment Citigroup
Day B

Payment Reconciliation

If actual collection is < invoices sold

• Shortfall up to FLDG, borne by client

• Balance shortfall reimbursed by Citigroup

Pay shortfall in excess of FLDG

Client Citigroup Day C

However, certain conditions are to be kept in mind:

→ Securitization of receivables is done through assignment of debtors and

assignment of debts is done under a standard irrecoverable receivables agreement.

→The Company is the collection agent throughout the tenure of the deal. Recourse to
the company in the event of default (Pre-determined recourse level- FLDG limit)

→Selection of poor of receivables is based on pre defined criteria’s such as

▪Authorized dealers
▪No over dues greater than 90 days and no re-structuring of debts
▪Minimum association of 2 years
▪Consistent profitability record
▪Receivables pertains only to the sale of client’s products
▪Receivables do not present disputed amounts
▪Not from negative locations as specified by bank.

Another facility offered by banks for receivables is simple B/R discounting. In this the
Bank takes the bill from the client and in return pays it the discounted amount on first day
and on the due date it collects the amount from the dealer. Thus in this way the firm is
getting the funds on the very first day.

Recently, Citibank has come up with some new products/facilities in Payables
Management, these products/facilities basically deals with pre-delivery finance and post
delivery finance.

Pre-delivery finance is basically providing financing to the key suppliers of clients.

Usually, if a supplier will borrow from some other Bank, he will pay an interest rate of
say X% on the total amount. Now what Citibank has proposed that if the supplier
borrows money or loan from Citibank on the client’s name then he will have to pay an
interest rate of say (X-3) %. As a result of this the supplier is directly saving 3% interest
rate on the entire amount. The benefit to the client is that the supplier will pass on his
2%out of this 3% savings to the client in the form of reduced cost. Thus the firm’s cost of
its Raw Material and eventually it is going down without having an adverse effect on the
average payable period.

Moreover though this system supplier payments can be automated. It includes no

additional or financial liability for the client.

On the other hand, the major benefit to the supplier is the cheaper source of finance for
pre shipment stage. Moreover the bank is providing him funding of working capital
requirement without any collateral.

1.Purchase order

6.Accepted Hundi/invoice

4.Supply made as per P.O SUPPLIER

5.Hundi issued for the supply

7.Accepted Hundi/invoice

3.Loan created & Cr.20% margin

2.Accepted P.O+ pre loan application

8.Preshipment converted to post

9.Loan liquidated any excess credit to supplier

Next facility which post delivery financing implies financing the purchase of critical raw
materials. In the normal course of business, the client or the vendor usually pays the
supplier after the expiry of pre-determined period. Since the supplier is not getting the
money immediately on delivery but after 2 or 3 months as the case may be, he will
charge an interest rate that will be included in the cost of materials.

What Citibank has proposed is that it will pay the supplier discounted proceeds (i.e. after
deducting cash discount) on the very first date. Thus if the supplier was suppose to get Rs
100 from the client after one or two months as the case may be, now he will get Rs 93
from the Bank on the very first date (The Bank is charging an interest rate of 7%). On the
due date the Bank will debit the clients a/c by Rs 93 plus the interest rate on Rs 93 (say
7%). The benefit to the client is that earlier he was paying the supplier Rs 100 + 7% =
Rs 107, whereas now it is paying only Rs 99.51 to the Bank. Thus the entire extra cost of
interest that the client was paying earlier has now been passed on to the supplier and in
this way firm’s cost of creditors has gone down without having an adverse effect on
payment period.

Purchase Order
Supply made as per P.O

CLIENT Invoice issued for the supply SUPPLIER

Request to
discount and
pay post
on due
of supplies

Discounted proceeds paid after deducting cash discount


For this there are certain documentation requirements:

One time documentation

→Citibank offer letter to be duly accepted by the client.
→Board resolution from the client for signature verification on the transaction does.
Transactions based Documents
→Request letter from client
→Accepted B/E
→Original invoice
→Transport Documents.

Another facility offered by the Citibank is managing the entire payment process of the
In other words the Bank works as a “Bank Office”. It involves everything from printing
cheques, electronic authorization to payment advice generation and delivery.

Citibank also offers various Integration options such as Host-to-Host (H2H), ERP
integration and Electronic Banking.

H2H is basically a standalone system. In this the continues to run its existing program
and then at a later stage (after funding has been organized by treasury department and
files encrypted on server) posts them on Citibank’s server, there on Bank manages the
payment procedure.

However in ERP, the client put the payment file on Citibank’s site in the morning from
where the Citibank picks it up. It carries out the entire payment process such as printing
of cheques authorization and so on. In the evening it put this file on the site and the client
picks it up. When the client put this file in his system, it automatically updates the
payment file.

The advantage to the client in this are that it allows for paper based invoices and purchase
orders to be replaced by electronic surrogates including file dumps, print screen and other
electronic advices generated from client’s ERP.
(Which of them is the best option depends upon various factors but usually ERP is
considered better as it has its own inherent advantages, the business rules are pre-defined
and there are less chances of error)

Apart from these, Citibank also provide services in import and export finance by giving
credit to both suppliers and buyers and they directly benefit, as their cost of borrowing is
lower in this case.


The following conclusions have been drawn about the various elements of working
• There has been an improvement in overall inventory as well as other turnover
ratios like raw material turnover, W-I-P turnover, and finished goods turnover

over the years but still more concentration should be paid on inventory of finished
goods as this is a problem area. The inventory of finished goods is not getting
converted into sales as fast as it should be.
• The average collection period has gone up considerably in 2005. The firm should
go for automation and outsourcing of receivables to banks in order to improve the
position of its receivables. By outsourcing receivables, Yamaha’s collection
period will come down considerably.
• Lastly, as far the creditors are concerned there has been a reduction in average
payment period and an increase in creditors turnover ratio. In order to improve the
current position of payables the firm should avail Citibank’s services of pre and
post delivery financing (purchase of critical raw materials or paying the supplier
the amount for the goods he has supplied to Yamaha on the very first day). The
advantage to Yamaha is that its cost of creditors will go down without having an
adverse effect on its payment period. The reason is that this service will have a
direct impact on the costs of the supplier (his costs will go down) and as a result
of this he will lower the cost of materials that he is supplying to Yamaha.


• The study has been done only over a short period of time from year 2003 to
2005 and it is very difficult to give the exact trend.

• The recommendations are based on past data and are situation based.